The Rise of China's Clean Energy Industry

AgMRC Renewable Energy & Climate Change Newsletter
November 2010

Don Hofstrand
Agricultural Economist
dhof@iastate.edu

Clean energy is a major global growth industry of the future.  This is driven by the need to reduce carbon emissions that contribute to global warming and the need to provide cheap energy as the world’s demand for energy continues to grow and fossil fuel energy prices continue to rise.

China is becoming the dominant country in clean energy technologies. Its clean energy industry already provides over one million jobs.  And this appears to be just the beginning.  If its growth trajectory continues into the future, it may dominant the sector.

China’s attractive investment environment

China’s surging renewable energy industry has placed it at the top of the Renewable Energy Country Attractiveness Index as the most attractive location in which to invest in renewable energy projects, according to the Ernst & Young Company that has provided the index periodically since 2004.  The attractiveness indices provide scores for national renewable energy markets, renewable energy infrastructures and their suitability for individual technologies.  The indices rank scores on a scale of 1 to 100. 

As shown in Table 1, the U.S. is in second place behind China.  In the previous report, China and the U.S. were tied for first place.  The U.S. was in sole possession of first place in the report before that.  The recent drop in the U.S. ranking is due to its failure to enact a federal Renewable Energy Standard. 

Table 1.  Renewable Energy Country Attractiveness Indices

1/  68% wind index, 15% solar index and 17% biomass and other index
2/  includes both on-shore and off-shore wind
3/  includes both PV and CSP solar

Source: Ernst & Young

Germany is ranked third with India fourth.  Western European countries round-out the rest of the top ten with the exception of Canada at number nine.  China, U.S. and India, three of the top four, collectively represent over 40 percent of the world’s population. 

Wind energy

As shown in Table 1, China has by far the highest wind energy index. China will surpass the U.S. as the leader in wind power capacity by the end of 2010.  Global wind power capacity grew 31 percent in 2009. A third of the increase came from China, which doubled its capacity. This increase is the equivalent of a new wind turbine every hour.  Five of the 15 largest manufacturers in the world are Chinese companies, up from just one in 2005. 

Over the next ten years, China’s projected capacity increase ranges from 150 to 230 gigawatts from its capacity of25.8 gigawatts at the end of 2009.  At the upper end of the range,total Chinese wind capacity would be equivalent to 13 of China’s enormous Three Gorges Dam hydropower plants.

Although China is very strong in wind energy, it suffers from the fact that much of the wind resources are in unpopulated parts of China.  Also, there are difficulties in connecting to the national grid.  These are similar problems to those faced by the U.S. wind industry.

Energy consumption and greenhouse gas emissions

From preliminary data, it appears as though China has become the world’s largest energy user, surpassing the U.S.  Although this was expected, it came more quickly than anticipated.  Since 2000, China’s energy demand has doubled.  And future demand growth is expected to be strong considering China’s potentially rapid increase in the per capita consumption of its 1.3 billion people as it catches up with per capita consumption of the industrialized countries.

Also, China has recently surpassed the United States as the leading emitter of greenhouse gases such as carbon dioxide, as shown in Table 2.  The three largest emitters are China, United States and the European Union.  They collectively account for 44 percent of the world’s emissions.  However,the U.S. is a much larger emitter per capita than China with each person emitting the equivalent of 23.5 tons of carbon dioxide per year,compared to only 5.5 for China.

Table 2.  Greenhouse Gas Emissions by Country (2005)

1/ Including land use change emissions
2/ Not including land use change emissions – CO2e equals metric tons of carbon dioxide equivalents.
3/ A composite for the 27 countries of the European Union is not available.  However, the United Kingdom is 10.6, Italy 9.7 and France9.0. 

Source: Wikipedia

Carbon dioxide stays in the atmosphere for hundreds if not thousands of years.  So, carbon dioxide accumulates in the atmosphere over time.  Although China is currently the largest annual emitter of greenhouse gases, the cumulative emissions of the United States since the beginning of the industrial revolution are greater than China’s.  As shown in Figure 1, the cumulative annual emissions (purple area) of the U.S. are greater than the cumulative annual emissions (green area) of China.  

Figure 1.  Global CO2 Emissions from Fossil-Fuel Burning, Cement Manufacture, and Gas Flaring: 1752-2006

 
Source:  United States Environmental Protection Agency

China is concerned about the long-term effects of global warming.  A reduction in snow pack in the Himalayan Mountains would reduce water flow in the Yangtze and Yellow (Huang) Rivers that are critical to China’s agricultural and industrial sectors.  Also, rising oceans levels would cause problems for China’s populated and industrialized eastern shore. 



Regardless, China does not want to commit to absolute caps on greenhouse gas emissions.  It is concerned that absolute reductions will endanger its rapid economic growth rate.  Moreover, China argues that the major cause of global warming is the large cumulative emissions of the U.S. and other industrialized countries, as indicated above.  So these countries should bear the brunt of the emissions reduction.

However, China is focusing on setting market mechanisms to encourage polluters to slow their growth of greenhouse gas emissions.  China has established a renewable energy target of cutting carbon emissions per unit of economic output by 40% to 45% by 2020 from 2005 levels.  Also,China may set targets for its companies to reduce the amount of carbon they emit per unit of profit.  To support these companies, the government is considering allowing them to buy carbon credits to offset their emissions.  Furthermore, China will block projects by steel,cement and coal industry companies that exceed their targets for pollution.

China is considering starting a domestic carbon trading market by 2014.  The plan is to have “associations” run the market which would be overseen by the government. 
 
Although these are very aggressive goals, the impact on total greenhouse gas emissions will be limited if China’s economy continues on its rapid growth rate.  Improvements in the emissions per unit of economic output will be partially or totally offset by increases in the amount of economic output as China strives to increase the standard of living for its masses of people.

Rare earths

Rare earths include a range of 17 elements that are used in many electronic applications. One of these, neodymium, forms the basis for the magnets used in turbines. Turbines are used to generate electricity with uses ranging from wind turbines to electric vehicles.  So they are important for the development of renewable energy sources.

Currently, 97 percent of the rare earth elements come from China.  China holds the largest deposits of rare earths and is the only provider of dysprosium for heat-resistant magnets favored by hybrid car makers.  Due to the increased demand for rare earths, China has implemented export quotas. 

The U.S. was previously the largest producer of rare earths, mainly from a mine in California.  However, the mine was closed due to competition from China.  Rare earths are difficult to mine because concentrations of several rare earth elements are always found together.  And due to their similarity, the elements are difficult to separate.  In addition the mining operations cause environmental problems. 

In light of these conditions, the focus is to find new sources of rare earths.  These elements are not rare, but finding economically extractable deposits is rare.  Deposits have been found in Canada, Australia, Mongolia, Vietnam and Greenland.  Also, activities are underway to reopen the California mine using new mining techniques. But the mine’s production would fill only a small portion of the rapidly growing demand for rare earths. 

In addition, efforts are underway to find more efficient ways of using rare earths, or eliminating them entirely.  Also, efforts to recycle rare earths found in discarded electronic equipment have begun. 

Allegations of unfair advantage

China’s aim is to become a dominant exporter of clean energy technologies. However, to achieve this status, China may have been unfairly subsidizing its clean energy companies.  This may be in violation of the World Trade Organization (WTO) of which China is a member.  To counter these activities, importing countries can retaliate by imposing import tariffs.  However, multi-national companies are hesitant to impose tariffs for fear that they will lose favor with China on others aspects of their business.  So, these activities are going unchallenged.

In addition, WTO members are required to declare whether an industry is receiving any subsidies so importing countries can check to see if the exporter is in compliance with WTO.  The Chinese government has failed to make these declarations. 

These violations are all in addition to the exchange rate manipulation that China uses to keep the price of Chinese exports low in importing counties.  This is done by maintaining an artificial exchange rate between the Yuan and the currencies of the rest of the world.

Conclusion

Clean and renewable energy technologies are expected to be a major driver of economic growth over the next 50 years.  The country that lays the strongest foundation for research, development, production and consumption will reap the rewards in terms of jobs and economic activity, which are expected to be large.  Although the U.S. was expected to occupy this position at the beginning of the 21st century,China is emerging as the leader.  Also, it appears that the U.S. may continue to fade further unless we take action to reverse the trend.     

References

Global Wind Energy Outlook 2010, Global Wind Energy Council and Greenpeace, October 2010

The Renewable Energy Country Attractiveness Indices, Ernst & Young, Issue 26, August 2010  

China is the Most Attractive County for Renewable Investments, Renewable Energy World, September 8, 2010

Rare Earths: Elemental Needs of the Clean-Energy Economy, Scientific American, October 13, 2010 

On Clean Energy, China Skirts Rules, The New York Times, September 9, 2010

China May Start State-Guided Carbon Market by 2014.  Bloomberg, June 27, 2010

China overtakes U.S. as Biggest Energy Consumer.  Environmental New Network, October 12, 2010